Fitch: U.S. Closed End Fund Derivative Use: Economics and Transparency Key

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NEW YORK--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: Closed-End Funds: Derivatives Under Review (Increased Use and Limited Transparency Are Key Considerations)http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656591

The use of derivatives by U.S. closed-end mutual funds (CEFs) is highlighted in a special report published today by Fitch Ratings. The timing of the report coincides with renewed regulatory focus on the use of derivatives by open- and closed-end mutual funds.

MANY CEFs, MANY USES:

Out of 121 U.S. CEFs with Fitch-rated leverage, 88 utilized some form of derivative as of Sept. 30, 2011. Total notional value of these derivatives totaled $4.2 billion, of which $3.8 billion was used to take long positions or assume leverage.

CEFs use derivatives to reference a variety of risk exposures such as money market indices, treasury rates, foreign currencies, corporate credits, municipal bonds and equities. A list of the types of derivative activities/strategies undertaken by Fitch-rated funds is included as part of the special report.

BENEFITS AND RISKS:

Derivatives can serve important roles for CEF portfolio managers, including providing more efficient means of assuming or hedging credit and market risks. However, derivatives may also create additional leverage and/or risk concentrations which can erode protections to senior creditors and amplify losses in a downside scenario. Derivatives may also introduce counterparty risk.

FITCH AND REGULATORY TREATMENT:

Fitch looks through to the referenced assets/risk exposures when analyzing derivative positions and grosses up the balance sheet and leverage measures to replicate the amount of leverage as if the position had been cash funded. The Securities and Exchange Commission (SEC) has issued a number of guidelines over the years in an attempt to regulate derivative use in regulated investment companies. The SEC's recently published public comment on the topic is an attempt to take a fresh and closer look at the issue.

The special report titled 'Closed-End Funds: Derivatives Under Review (Increased Use and Limited Transparency Are Key Considerations)' is available at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Closed-End Fund Debt and Preferred Stock' (dated Aug. 16, 2011).

Applicable Criteria and Related Research:

Rating Closed-End Fund Debt and Preferred Stock

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648840

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch RatingsBrian Bertsch, +1-212-908-0549Media Relations, New York[email protected]orYuriy Layvand, CFA, +1-212-908-9191DirectorFitch, Inc.One State Street PlazaNew York, NY 10004orIan Rasmussen, +1-212-908-0232Senior Director

Source: Fitch Ratings

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